7.2.2 any payment previously made by the Covenantors to the Buyer under clause 2 of this Deed;
3.1 This clause is sometimes narrowed so that repayment is only made in the event that payment has been made to the Buyer in respect of the same matter under the covenant. It is our opinion that this is harsh: the reasons for this are examined below. This examination demonstrates that the above wording deals with the four alternative scenarios in respect of such recoveries.
3.2 If a payment is made by the Covenantors under the deed and there is a later recovery in respect of tax, there is a need to analyse the alternative scenarios: the recovery may be in respect of a tax liability which was recognised in the accounting records before or after Completion. The tax liability has been recognised in the accounting records before Completion if it has been paid before Completion or if provision has been made in the Completion Accounts, and it is therefore shown as a liability at Completion. The related recovery may also have been recognised either before or after Completion. It is recognised before Completion if it is included as an asset in the Completion Accounts. 3.3 If the liability has been recognised before Completion and the recovery is shown as an asset in the Completion Accounts, then the recovery probably represents an Accounts Relief, which is a component of Buyer’s Reliefs. Therefore, if professional fees have been paid relating to an HMRC enquiry and a receivable has been included in respect of the reimbursement due from the tax investigation fee insurance policy, the receivable would be considered to be an Accounts Relief. In such a circumstance this recovery should not be a credit to the Covenantors as they have already been recompensed for this recovery as the value of the recovery has been included on the balance sheet. This is the reason for the use of the phrase: “... and such recovery is not an Accounts Relief....” in the above definition of “Recovery.” 3.4 The next possibility is that provision for the Tax Liability was made in the Completion Accounts (or the tax was paid before Completion) but the prospect of recovery was not sufficiently certain to justify its inclusion as an asset. In this situation there has been a recovery which is in the form of a windfall to the Buyer. It cannot be related to any amount paid under the tax covenant as the related Tax Liability cannot have been the subject of a claim under the tax covenant: this is on the grounds that it will have been covered by the exclusion relating to amounts provided for in the Completion Accounts, or it will be a Tax Liability paid before Completion. It is our view that such a recovery should be a credit for the Covenantors, to be applied against claims in respect of other matters arising under the tax covenant. 3.5 The third alternative is that, for reasons that we cannot readily identify, other than an accounting error, the liability for the tax was not accounted for up to Completion, but the related asset was recognised. This scenario is a very unlikely one; however, the recovery is probably an Accounts Relief and is therefore a Buyer’s Relief and it should not be to the credit of the Covenantors. The Tax Liability will represent a valid claim
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